PITTSBURGH – West Penn Allegheny Health System recorded a loss of $52 million in its 2011 fiscal year – an amount that would have been nearly double had it not received $50 million from health insurer Highmark on June 28, just two days before closing its books for the year.
In light of the losses, the system's 2011 financial performance was poor enough for its accounting firm KPMG to note serious concerns about WPAHS' ability to continue in the future as a going concern. According to the auditors, preliminary first quarter 2012 results showed the trend continuing. It warned that more losses could result in WPAHS not having sufficient capital to make debt payments by June 30, which could potentially lead to default.
"In addition to these recurring losses, WPAHS has experienced a significant decline in volumes within a challenging demographic service area that includes significant competition. If such an acceleration were to occur, WPAHS would not have sufficient liquidity to meet its obligation," the audit report noted.
But Keith T. Ghezzi, MD, WPAHS interim president and CEO responded to the audit by noting that KPMG could only make its observation of the systems' financial health based on its past performance and without regard to its existing affiliation agreement with health insurer Highmark, an agreement that stands to pump as much as $400 million into the beleaguered health system, should it gain regulatory approval.
"Accounting standards preclude any comments by auditors on future plans or events, most notably the proposed affiliation with Highmark," noted Ghezzi in a statement in late December. "Highmark's financial support is enabling immediate improvements in our facilities."
Proof positive of Highmark's continued investment in WPAHS came less than a week later when it announced its latest investment: $20 million of first phase funding to redevelop Forbes Regional Hospital, which operates in Pittsburgh's eastern suburbs.
The infusion of cash from Highmark will allow the hospital system to renovate medical/surgical units, open a breast care center and add a third cardiovascular surgery operating room, among other upgrades.
According to the affiliation agreement between the two companies released in mid-December, Highmark has already committed $150 million in capital to West Penn through the end of 2011. It provided a $50 million grant in late June and in November it provided an additional $100 million – another $50 million grant along with a $50 million loan.
But if fiscal year 2011 is any indication that money may not last long, and Ghezzi used KPMG's audit to push for quick review of the affiliation.
"We are absolutely committed to our partnership with Highmark and to improving our financial situation," Ghezzi noted. "The audit report underscores the need for expedited review and approval of the Highmark-WPAHS transaction..."
For Highmark, investing in WPAHS is both good for its business – its attempts to negotiate a new contract with the areas dominant health system, UPMC are at an impasse – and good for the region.
"Fundamentally we are talking about an investment that will preserve 12,000 area jobs," said Highmark spokesman Aaron Billger. "There is a sense of urgency about this affiliation since it is about preserving choice in healthcare providers and preserving a community asset."